Fiscal sponsorship explained: working under another charity

This guide is for anyone with a charitable project who wants to raise tax-deductible gifts or apply for grants, but doesn't have, or doesn't want yet, a 501(c)(3) of their own. A fiscal sponsor is an established charity that agrees to take a project under its wing. Our should I start a charity? stage introduces the idea. This guide goes further: the two common models, what sponsors charge, how to choose one and what the agreement should say. After reading, you'll know what to ask a possible sponsor, and what to check before you sign.

What fiscal sponsorship is

Candid Learning, the training site of the nonprofit research organization Candid, describes fiscal sponsorship as a formal arrangement in which you work with an existing 501(c)(3) public charity instead of starting your own nonprofit. You can then seek grants and tax-deductible donations under the sponsor's tax-exempt status.

Candid gives two reasons people choose it:

• More funding options. Most grantmakers fund organizations rather than individuals, so a sponsor can open doors, for example for artists.
• Starting sooner. You may be able to start your project right away, while you decide whether to pursue your own nonprofit status.

The trade-off is control. The money is given to the sponsor, so the sponsor, and its board, have the final say over it. That's what makes the gifts deductible, and it's why the agreement matters so much.

The two common models

Fiscal sponsorship comes in several forms, often called by letters. Gregory Colvin, a retired principal of the law firm Adler & Colvin and co-author of a book on fiscal sponsorship, describes them in an interview published by the Fiscal Sponsor Directory. Two are the ones most small projects meet.

Gene Takagi, a nonprofit lawyer at NEO Law Group, writes on the Nonprofit Law Blog that in Model A "the project has no separate legal existence", and that the sponsor may be liable for the project's debts and obligations. Colvin says people who work on a Model A project usually get paid as the sponsor's employees. In Model C, Takagi writes, sponsor and project have a grantor-grantee relationship.

Colvin's interview also describes other models, such as hiring workers as independent contractors (Model B), a group exemption where local chapters operate under one central charity (Model D) and back-office services (Model F). If a sponsor offers something unusual, ask it which model it uses and why.

What it costs

Sponsors charge a fee for their administrative services. Candid says the sponsor keeps a fixed share of donations, "typically five to 10 percent". Fees and what they cover vary between sponsors, so:

• ask for the fee schedule in writing;
• ask what the fee covers: bookkeeping, payroll, insurance, grant reports, donor receipts, legal review;
• ask whether there are extra charges, such as for setting up, for grants from government agencies or for leaving;
• compare at least two sponsors.

How to choose a sponsor

Candid suggests looking for nonprofits with missions like yours, starting with groups you already belong to, and using the Fiscal Sponsor Directory, which lets you search by state, service category or keyword. Our directory lists it and several national sponsors.

Before you sign, check:

1. It's really a charity. Look the sponsor up in the IRS's free Tax Exempt Organization Search, which shows whether an organization is eligible to receive tax-deductible gifts.
2. The mission fits. Candid suggests showing a sponsor how your project advances its mission, so look for one whose mission includes your work.
3. The model fits. Will you hire people? Then a comprehensive sponsor that can run payroll may suit you. Do you already have your own organization and staff? A pre-approved grant model may fit better.
4. The service is good. Ask how long it takes to pay a bill, send a donor receipt or sign a grant application. Ask to speak with two projects it sponsors now.
5. It looks at you closely too. Takagi lists sponsoring a project without proper review, and choosing a sponsor without proper review, as two of the six common mistakes. A sponsor that asks nothing about you may not look after the arrangement well.

Candid also advises being ready with a short proposal for the sponsor: your project's goals, your budget, and how the project advances the sponsor's mission.

What the agreement should cover

Takagi lists working without a written agreement, and an agreement without clear exit terms, among the six ways to get fiscal sponsorship wrong. Candid also stresses structuring the agreement carefully. Make sure yours covers:

• Which model it is, and who controls the money and the work.
• The fee, what it covers and when it's taken.
• How you'll ask for money: who signs grant applications, how gifts are receipted and what name donors see.
• Reports: what the sponsor needs from you, and how often.
• Who owns what: your project's name, website, donor list, equipment and any work it creates.
• Leaving: how either side can end the arrangement, how much notice is needed, and what happens to remaining money and property if you form your own charity or close the project.

Social Impact Commons publishes free sample agreements for Model A and Model C, which Candid points to. Have a lawyer review the agreement before you sign. Our legal basics guide explains where to find free or low-cost legal help.

When to move on

Fiscal sponsorship can last for years, or be a stepping stone. Signs it may be time to form your own charity: your budget and staff have grown, you need to make decisions faster than the sponsor can, or funders ask for your own 501(c)(3). Use our structure chooser to compare options, and read the founder pathway before you file anything.

Your fiscal sponsorship checklist

• We know why we want a sponsor: tax-deductible gifts, grants, payroll, or time to test the idea.
• We know which model we need: comprehensive (Model A) or pre-approved grant (Model C).
• We've talked to at least two possible sponsors with missions like ours.
• We checked each sponsor in the IRS Tax Exempt Organization Search.
• We have each sponsor's fee schedule in writing, and know what it covers.
• We spoke with at least one project each sponsor supports now.
• Our written agreement covers the model, control, fees, fundraising, reports, ownership and leaving.
• A lawyer reviewed the agreement before we signed.
• We've told donors, in plain words, that gifts go to the sponsor for our project.

A good fiscal sponsor lets you spend your energy on the work instead of the paperwork. Choose carefully, put everything in writing, and keep talking. If you'd like help comparing agreements, ask a member charity on the Exchange.